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IS HRM Dept. profit Centre ? How to make HR Detp. profit Centre? Express your views
Type: HR, Report if not a HR topic
Posted 15-12-2009Reply
Looking for PPT and views on the same
Dear,
Profit Center
A profit center is a unit of a company that generates revenue in excess of its expenses. It is expected that, through the sale of goods or services, the unit will turn a profit. This is in contrast to a cost center, which is a unit inside a company that generates expenses with no responsibility for creating revenue. The only expectation a cost center has is to lower expenses whenever possible while staying with a specific budget that is determined at the corporate level.
Beyond that simple definition, the term "profit center" has also come to represent a form of management accounting that is organized around the profit center concept. Companies that have adopted the profit center system have organized all of their business units as either profit centers or cost centers, and all company financial results are reported in that manner. Adopting a profit center system often requires a radical shift in corporate philosophy and culture, but it can yield great returns in net before tax (NBT) profits. According to an article in Business Solutions, the data collection company Data Recognition, Inc. made the shift to a profit center-based system and was pleased with the results. "We saw the importance of evaluating, individually, areas of our business that are distinctly different," said Steve Terry, the company's vice president of systems. "The profit centers have allowed us to better identify specific gains and losses. And that's critically important for a growing business."
All companies, no matter what size, have both cost and profit centers (although, if it is a single-person company, that company would really have profit and cost activities, since all business "units" are the same person). For example, in most companies, units such as human resources and purchasing are strictly cost centers. The company has to spend money to operate those units, and neither has any means of producing a profit to offset those expenses. They exist solely to make it possible for other areas of the company to make money. However, without those two departments, the company could not survive. Examples of profit centers would be the manufacturing units that produce products for sale to consumers or other businesses. The sale of those products generates a profit that offsets the expense of creating the products.
All companies have profit centers and cost centers, but not all companies organize their accounting practices around the profit center concept. In fact, most companies do things the time-honored way, producing overall profit and loss statements for the company as a whole, without making each business unit accountable for generating a profit.
Turning a Cost Center Into a Profit Center
A cost center may actually provide services that could generate a profit if they were offered on the open market. But in most corporate environments, cost centers are not expected to generate a profit and operation costs are treated as overhead. Departments that are typically cost centers include information technology, human resources, accounting, and others. However, the complacent acceptance that some departments will always be cost centers and can never generate a profit has changed at some companies. They recognize that cost centers can turn into profit centers by taking the services they used to automatically provide to the company's other business units and making those services available for a fee. The company's other business units are then required to pay for the services they used to get for free. But in return, they are allowed to go outside the company and contract with another firm to provide those services. Likewise, the former cost center may be allowed to sell its services to other companies. The expectation is that this free market system will improve performance through increased competition while increasing profits by turning former cost centers into profit centers.
"When a business firm becomes a corporate community of entrepreneurs who buy, sell, and launch new products and services internally as well as externally, it gains the same creative interplay that makes market economies so advantageous," said management professor William E. Halal when discussing making the move to profit center-based operations in USA Today Magazine.
As an example of how a cost center may be turned into a profit center, consider a company's information technology (IT) department. This department may provide such services as computer-aided design, network administration, or database development to other units of the company. These services have value, and they are important to the company's overall success, but they do not generate a profit. IT may charge the "cost" of its services back to the department that requested them, but it does not make a profit because it charges only for its actual costs incurred, without adding an extra margin for profit. The unit that requested the services absorbs the cost as part of its overhead; or, in some companies, the cost is not charged back and is simply part of the company's overall overhead.
There are two ways that the IT department could make the switch from cost center to profit center. First, instead of writing off its services to overhead or charging them at cost, the IT department could be allowed to bill other departments for its services at going market rates. The profit earned for the services would exceed the cost of providing the services. While all the money in this transaction would stay within the company, thus making it seem to be a meaningless way of creating a profit for the IT department, it is done for two reasons. One is to ensure that the IT department remains competitive with outside vendors providing the same services, and the other is to ensure that the company's other business units do not waste money on needless IT expenditures. Paying competitive market rates prevents the operating units from wasting money, thus making them more competitive.
If the IT department is turned into that type of profit center, it is considered to be a "zero profit center." In that situation, the department is expected to compete with outside vendors for the company's information technology budget. If a division of the company selects the IT department as its technology provider, it has done so because it feels it cannot purchase the same quality services for a lower price from an outside vendor. It will not actually "pay" the IT department for its services, but it will be charged by the IT department for services rendered, and those charges will be subtracted from the division's budget. Thus, the IT department does not really take in any revenue, but neither does it cost the company any money because the division that utilized its services would have had to spend money to hire an outside vendor. This, then, creates a zero profit center. Such a business model forces the IT department to be more competitive in its pricing and to provide high quality work if it hopes to survive as an operating unit.
The second way the IT department could become a profit center is if the company determined that the department was one of the best in the industry, better in fact than some companies that existed just to provide IT services. The company could then allow the department the freedom to sell its services to outside customers. Thus, the department would still operate as a cost center in its dealings with other units inside the company, but it would operate as a profit center when it provided services to outside companies. This method of operation has become far more common in the 1990s and beyond, as companies seek new revenue streams that have low start-up costs.
If the IT department exists only as a cost center, it faces enormous pressure to provide services at the lowest possible costs. Because it does not generate profits, it must constantly fight to remain in existence and must fight off attempts to slash its budget to free up cash for the company's profit centers. Just as the company's senior management could decide that the IT department was good enough to operate as a profit center by soliciting outside clients, so too could it decide that the department is behind the times and is not providing adequate services. This would result in management choosing to shut down the department and contract with an outside vendor for the company's IT needs.
Profit Centers and Their Changing Role in Industry
In large companies, especially manufacturing companies, it has become a fairly common occurrence to break the company into small pieces, with each piece operating as a profit center that has to compete for business. In this manner, a large business can suddenly find itself operating as a small business. For example, say the Acme Company produces a finished product that is composed of five smaller parts. Instead of operating as one large company that produces all five parts needed for the finished product, Acme has decided to split into six separate units—one that assembles and sells the finished product, and five smaller companies that each produce one of the parts needed for the finished product. Beyond Acme, there are other companies that produce those same five parts needed to produce the finished product.
Each of the five part manufacturers is now operating as a separate profit center, reporting to Acme's corporate office. Each has to determine its own methods of operation, and each has to determine how it is going to show a profit. There may be internal agreements in place that mandate that each of the five units will continue to work together to produce the finished product, or Acme may throw things wide open by stating that there is no corporate mandate forcing the five divisions to continue to work together.
If the latter model is chosen, the corporation may have decided that, while the company could continue making steady—but small—profits if it kept using the five units together as it had for decades, there was a chance that the company could make huge profits if it made each of the five units accountable for its own bottom line and opened up the manufacturing process to both internal and external competition. In such a radical environment, it was conceivable that one of the five units could go bankrupt and cost the company money, but senior management believed that the hugely increased profits in the other four units, and the resulting higher profit margin realized by the sale of the finished product, would more than offset the loss of one unit.
Thus, each of Acme's five units, formerly divisions within the larger company that were not accountable for directly generating profits, were now separate entities that had to show a profit to continue operating. Each of the units had gone from a cost center mentality—buying materials to produce part of a product that showed up on the company's overall bottom line—to a profit center mentality, responsible for showing a profit based solely on the production and sale of its one part. As part of the shift to becoming a profit center, each of the five units would also be free to sell its part on the open marketplace. Acme might make that freedom a restricted one that prevented sales to a direct competitor, or it might take the full plunge and make the unit a fully stand-alone company that was free to sell its part to any other company in the market, including direct competitors. That decision would dictate whether Acme's move was a small one, designed to encourage each of its five units to think creatively and work harder to perform at a high level, or a large one, designed to change the very core of the company's business in a bid for higher profits.
Profit Centers and Small Businesses
When operating a small business, it may not be practical to use the profit center concept initially because the business is so small. Fewer employees mean fewer business units, which means fewer opportunities to create profit centers. In addition, in a small business, the president or the chief financial officer is probably monitoring financial results very closely, which means that he or she knows exactly where profits and losses are occurring. However, as a small business begins to grow, establishing profit centers often makes sense. Data Recognition, Inc. found that switching to profit centers made sense as the company increased in size. "Establishing profit centers, and generating daily profit/loss statements, has allowed us to better identify, and correct, our weaknesses," said vice president Steve Terry.
Even without adopting the profit center accounting concept, the idea of profit centers has value for small businesses in that they should always be looking for new ways to generate revenue. When operating a small business, there are essentially two ways to create a new profit center. The first method is to create an extension of the original business—a new product related to existing products, or new services that build on services that are already offered. The second method is to create an entirely new business altogether that can operate using the first business's corporate infrastructure (at least initially) and that can be operated at the same time as the original business.
The rapid spread of the World Wide Web has created an unprecedented method for creating new profit centers. Almost every company today has a Web site to dispense public relations information and to make it easier for customers to contact the company, but more and more firms are recognizing that there is money to be made on the Web. Most corporate Web sites begin life as a cost center, since they are initially just used to disseminate information, but most can be transformed into a profit center.
When seeking new profit centers, small business entrepreneurs should avoid business models that have regularly failed on the Web. These include setting up an entertainment site that attempts to charge a fee for that entertainment; relying on advertising as a revenue stream, as banner advertisements are proving to be quite unsuccessful in bringing in new customers; charging subscription or other visitor fees; and biting off more than you can handle by attempting to establish business-to-business sales that may not be achievable.
Courtesy: Answers.com
Profit Center
A profit center is a unit of a company that generates revenue in excess of its expenses. It is expected that, through the sale of goods or services, the unit will turn a profit. This is in contrast to a cost center, which is a unit inside a company that generates expenses with no responsibility for creating revenue. The only expectation a cost center has is to lower expenses whenever possible while staying with a specific budget that is determined at the corporate level.
Beyond that simple definition, the term "profit center" has also come to represent a form of management accounting that is organized around the profit center concept. Companies that have adopted the profit center system have organized all of their business units as either profit centers or cost centers, and all company financial results are reported in that manner. Adopting a profit center system often requires a radical shift in corporate philosophy and culture, but it can yield great returns in net before tax (NBT) profits. According to an article in Business Solutions, the data collection company Data Recognition, Inc. made the shift to a profit center-based system and was pleased with the results. "We saw the importance of evaluating, individually, areas of our business that are distinctly different," said Steve Terry, the company's vice president of systems. "The profit centers have allowed us to better identify specific gains and losses. And that's critically important for a growing business."
All companies, no matter what size, have both cost and profit centers (although, if it is a single-person company, that company would really have profit and cost activities, since all business "units" are the same person). For example, in most companies, units such as human resources and purchasing are strictly cost centers. The company has to spend money to operate those units, and neither has any means of producing a profit to offset those expenses. They exist solely to make it possible for other areas of the company to make money. However, without those two departments, the company could not survive. Examples of profit centers would be the manufacturing units that produce products for sale to consumers or other businesses. The sale of those products generates a profit that offsets the expense of creating the products.
All companies have profit centers and cost centers, but not all companies organize their accounting practices around the profit center concept. In fact, most companies do things the time-honored way, producing overall profit and loss statements for the company as a whole, without making each business unit accountable for generating a profit.
Turning a Cost Center Into a Profit Center
A cost center may actually provide services that could generate a profit if they were offered on the open market. But in most corporate environments, cost centers are not expected to generate a profit and operation costs are treated as overhead. Departments that are typically cost centers include information technology, human resources, accounting, and others. However, the complacent acceptance that some departments will always be cost centers and can never generate a profit has changed at some companies. They recognize that cost centers can turn into profit centers by taking the services they used to automatically provide to the company's other business units and making those services available for a fee. The company's other business units are then required to pay for the services they used to get for free. But in return, they are allowed to go outside the company and contract with another firm to provide those services. Likewise, the former cost center may be allowed to sell its services to other companies. The expectation is that this free market system will improve performance through increased competition while increasing profits by turning former cost centers into profit centers.
"When a business firm becomes a corporate community of entrepreneurs who buy, sell, and launch new products and services internally as well as externally, it gains the same creative interplay that makes market economies so advantageous," said management professor William E. Halal when discussing making the move to profit center-based operations in USA Today Magazine.
As an example of how a cost center may be turned into a profit center, consider a company's information technology (IT) department. This department may provide such services as computer-aided design, network administration, or database development to other units of the company. These services have value, and they are important to the company's overall success, but they do not generate a profit. IT may charge the "cost" of its services back to the department that requested them, but it does not make a profit because it charges only for its actual costs incurred, without adding an extra margin for profit. The unit that requested the services absorbs the cost as part of its overhead; or, in some companies, the cost is not charged back and is simply part of the company's overall overhead.
There are two ways that the IT department could make the switch from cost center to profit center. First, instead of writing off its services to overhead or charging them at cost, the IT department could be allowed to bill other departments for its services at going market rates. The profit earned for the services would exceed the cost of providing the services. While all the money in this transaction would stay within the company, thus making it seem to be a meaningless way of creating a profit for the IT department, it is done for two reasons. One is to ensure that the IT department remains competitive with outside vendors providing the same services, and the other is to ensure that the company's other business units do not waste money on needless IT expenditures. Paying competitive market rates prevents the operating units from wasting money, thus making them more competitive.
If the IT department is turned into that type of profit center, it is considered to be a "zero profit center." In that situation, the department is expected to compete with outside vendors for the company's information technology budget. If a division of the company selects the IT department as its technology provider, it has done so because it feels it cannot purchase the same quality services for a lower price from an outside vendor. It will not actually "pay" the IT department for its services, but it will be charged by the IT department for services rendered, and those charges will be subtracted from the division's budget. Thus, the IT department does not really take in any revenue, but neither does it cost the company any money because the division that utilized its services would have had to spend money to hire an outside vendor. This, then, creates a zero profit center. Such a business model forces the IT department to be more competitive in its pricing and to provide high quality work if it hopes to survive as an operating unit.
The second way the IT department could become a profit center is if the company determined that the department was one of the best in the industry, better in fact than some companies that existed just to provide IT services. The company could then allow the department the freedom to sell its services to outside customers. Thus, the department would still operate as a cost center in its dealings with other units inside the company, but it would operate as a profit center when it provided services to outside companies. This method of operation has become far more common in the 1990s and beyond, as companies seek new revenue streams that have low start-up costs.
If the IT department exists only as a cost center, it faces enormous pressure to provide services at the lowest possible costs. Because it does not generate profits, it must constantly fight to remain in existence and must fight off attempts to slash its budget to free up cash for the company's profit centers. Just as the company's senior management could decide that the IT department was good enough to operate as a profit center by soliciting outside clients, so too could it decide that the department is behind the times and is not providing adequate services. This would result in management choosing to shut down the department and contract with an outside vendor for the company's IT needs.
Profit Centers and Their Changing Role in Industry
In large companies, especially manufacturing companies, it has become a fairly common occurrence to break the company into small pieces, with each piece operating as a profit center that has to compete for business. In this manner, a large business can suddenly find itself operating as a small business. For example, say the Acme Company produces a finished product that is composed of five smaller parts. Instead of operating as one large company that produces all five parts needed for the finished product, Acme has decided to split into six separate units—one that assembles and sells the finished product, and five smaller companies that each produce one of the parts needed for the finished product. Beyond Acme, there are other companies that produce those same five parts needed to produce the finished product.
Each of the five part manufacturers is now operating as a separate profit center, reporting to Acme's corporate office. Each has to determine its own methods of operation, and each has to determine how it is going to show a profit. There may be internal agreements in place that mandate that each of the five units will continue to work together to produce the finished product, or Acme may throw things wide open by stating that there is no corporate mandate forcing the five divisions to continue to work together.
If the latter model is chosen, the corporation may have decided that, while the company could continue making steady—but small—profits if it kept using the five units together as it had for decades, there was a chance that the company could make huge profits if it made each of the five units accountable for its own bottom line and opened up the manufacturing process to both internal and external competition. In such a radical environment, it was conceivable that one of the five units could go bankrupt and cost the company money, but senior management believed that the hugely increased profits in the other four units, and the resulting higher profit margin realized by the sale of the finished product, would more than offset the loss of one unit.
Thus, each of Acme's five units, formerly divisions within the larger company that were not accountable for directly generating profits, were now separate entities that had to show a profit to continue operating. Each of the units had gone from a cost center mentality—buying materials to produce part of a product that showed up on the company's overall bottom line—to a profit center mentality, responsible for showing a profit based solely on the production and sale of its one part. As part of the shift to becoming a profit center, each of the five units would also be free to sell its part on the open marketplace. Acme might make that freedom a restricted one that prevented sales to a direct competitor, or it might take the full plunge and make the unit a fully stand-alone company that was free to sell its part to any other company in the market, including direct competitors. That decision would dictate whether Acme's move was a small one, designed to encourage each of its five units to think creatively and work harder to perform at a high level, or a large one, designed to change the very core of the company's business in a bid for higher profits.
Profit Centers and Small Businesses
When operating a small business, it may not be practical to use the profit center concept initially because the business is so small. Fewer employees mean fewer business units, which means fewer opportunities to create profit centers. In addition, in a small business, the president or the chief financial officer is probably monitoring financial results very closely, which means that he or she knows exactly where profits and losses are occurring. However, as a small business begins to grow, establishing profit centers often makes sense. Data Recognition, Inc. found that switching to profit centers made sense as the company increased in size. "Establishing profit centers, and generating daily profit/loss statements, has allowed us to better identify, and correct, our weaknesses," said vice president Steve Terry.
Even without adopting the profit center accounting concept, the idea of profit centers has value for small businesses in that they should always be looking for new ways to generate revenue. When operating a small business, there are essentially two ways to create a new profit center. The first method is to create an extension of the original business—a new product related to existing products, or new services that build on services that are already offered. The second method is to create an entirely new business altogether that can operate using the first business's corporate infrastructure (at least initially) and that can be operated at the same time as the original business.
The rapid spread of the World Wide Web has created an unprecedented method for creating new profit centers. Almost every company today has a Web site to dispense public relations information and to make it easier for customers to contact the company, but more and more firms are recognizing that there is money to be made on the Web. Most corporate Web sites begin life as a cost center, since they are initially just used to disseminate information, but most can be transformed into a profit center.
When seeking new profit centers, small business entrepreneurs should avoid business models that have regularly failed on the Web. These include setting up an entertainment site that attempts to charge a fee for that entertainment; relying on advertising as a revenue stream, as banner advertisements are proving to be quite unsuccessful in bringing in new customers; charging subscription or other visitor fees; and biting off more than you can handle by attempting to establish business-to-business sales that may not be achievable.
Courtesy: Answers.com
Dear,
You too can help the organization
to drive the business.
1. Analyze the organization’s vision
– Evaluate, articulate and clarify the organization’s
strategic plan for accomplishing its vision. Every firm should have a unique vision
and a specific plan to achieve it. Consider all the ways that the HR department
currently helps or hinders the company’s mission. How could changes in HR policies,
procedures and practices positive affect the strategy? What can HR do to make
it more likely that employees will achieve the company’s vision according to its
strategic plan?
2. Create a business case
– Clearly show upper management how and why HR is a
strategic asset and how it can increase profits. Explain how HR will provide the
organization with its most critical resource: qualified, valuable employees capable of
implementing and achieving the strategic plan. Show how HR can build employees’
knowledge, skills, abilities and attitudes to help the company achieve its mission. It
used to be that typical companies regarded the HR function in terms of "how can we
cut costs." But, today’s most profitable, forward-looking organizations view HR in
terms of "how can an HR strategy result in increased profitability?" The answer to
this question will help upper management see the value of strategic HR.
3. Determine how the company creates value
– How does the organization serve its
customers or clients? Draw a strategy map that illustrates the steps toward meeting
strategic goals. Identify the behaviors that achieve those objectives.
4. Identify HR enablers and performance drivers
– Use the strategy map to diagnose where
HR can make positive changes to elicit behaviors that mark good performance.
5. Evaluate the current HR system
– Look at your organization, policies, procedures,
compensation and reward programs. Does the system augment the company’s key
performance drivers? Do your policies attract, develop and retain staffers who
produce the results the company wants? If not, the policies are misaligned.
6. Define what you need to measure
– What factors can you measure to show if HR
is helping or hindering strategic performance? Create a system to collect data and
measure those factors. This will be your company’s "HR Scorecard." Its numbers are
only as valuable as the relevant information they provide about specific situations.
Much of this data may not be readily available because it wasn’t previously measured.
Since irrelevant data is of no benefit, you may need to collect new types of data, more
frequent data or data from new sources.
7. Implement the HR Scorecard
– Gather data, measure performance outcomes and
analyze the results. This information lets you tweak HR’s activities and approach to
support the company’s strategic objectives more powerfully.
================================================== ==
An effective HR Scorecard serves two purposes as an management tool:
• It gives you the information you need to adjust HR’s actions and behaviors to achieve
better results.
• It validates HR’s contribution to the company’s success in financial terms.
WHAT YOU CAN DO WITH YOUR SCORECARD
• Focus the Scorecard on the most important goals in terms of the firm’s strategy.
• Determine how the elements of HR’s own system reinforce (or contradict) one
another. For instance, if you are always at full staffing levels, but the quality of the
staff is inadequate, then HR is not meeting the firm’s needs or supporting a strategy
that requires a high quality staff.
• The things you decide to measure on the HR Scorecard will attract attention, thus
they are the elements that will get managed. Select them carefully.
• Showcase the relationship between the cost and benefits of HR deliverables. For
example, it may cost more per hire to attract, recruit and retain high-quality staff,
but the benefits may outweigh the additional cost.
• Help upper management understand how HR can create value, so executives see that
it may be financially wiser to invest in HR than to cut its expenses.
• Differentiate between HR doable (what HR does) and HR deliverables (something
that creates desired employee behaviors that drive the company’s overall strategy).
• When evaluating measurements and results, recognize the difference between
leading indicators and lagging indicators.
• If the company’s strategy changes or the performance drivers affecting that strategy
change, HR’s strategy must also change and you must update the Scorecard.
• Conduct a Return on Investment (ROI) analysis to determine the best way for HR to
produce results that abet the company’s strategic plan.
FINALLY WHAT HRM SHOULD DO
1. HRM VISIBILITY --Make regular presentations about your successes/
contributions/ upcoming programs.
--------------------------------------------------------------------
2. HRM credibility – Sustain credibility by "living" the values you espouse, working
with others, establishing win-win relationships, being honest and taking initiative.
-----------------------------------------------------------------------
3. HRM Ability – Show you are able to organize, orchestrate, manage and deliver change initiatives.
which should aim at the HR objectives aligned with corporate objectives
-----------------------------------------------------------------------------------------
4. Cultivate the company’s culture – Deliberately weave the company’s values, mission,
vision and strategy into the HRM way into the business operation on day-to-day basis.
-------------------------------------------------------------------------------
5. Proficiency – Become capable in HR practices, theories and procedures. Commit to
learning and to delivering results based on what you learn from the company business.
-----------------------------------------------------------------------------------
6. Business knowledge – Understand how your company operates. Know its
technological, strategic, financial, sales and marketing functions. Understand how
they interact with each other and with HR, so you can identify ways HR can help.
--------------------------------------------------------------------------------------------------
7. Strategic performance management -Identify and link the strategic ways
that HR can contribute to the company’s
overall strategy and success.
------------------------------------------------------------------------------------
8. HR SCORECARD - Identify and implement appropriate, accurate ways to measure the influence of
HR activities on performance drivers and corporate strategy.
----------------------------------------------------------------------------------------------
9. HRM IMPACT - Estimate the potential implications of a change in HR to identify patterns and
connections in seemingly unrelated data, and to determine the impact that this
change will have on the company’s profits.
------------------------------------------------------------------------------------------------
10.THE MOST IMPORTANT OF ALL - HR COMMUNICATION -
Communicate how HR affects overall strategy and profits, so senior management
can understand that the change in HR represents a positive return on investment.
==================================================
If You Don’t Measure it, You Won’t Improve it
There are two ways, the HRM can contribute to the
GROSS PROFIT CONTRIBUTION.
1.GROWTH ORIENTED INITATIVES.
2.COST EFFICIENT INITATIVES.
1. THE GROWTH ORIENTED INITIATIVES.
Your impact on corporate performance is indeed measurable.
A statistical technique called regression analysis is one excellent way to measure your impact. The guiding principle of an effective regression analysis is to isolate certain variables (i.e., more effective talent management practices) in order to better measure their impact.
An example of this is focusing on a specific group of employees who can be tied to revenue, and implement initiatives or programs targeted toward these individuals.
Microsoft is even beginning to experiment with this technique in its workforce-planning efforts.
These are just a few of the ways you can demonstrate your impact on revenue and profits:
Improving the selection process for revenue-generating employees by implementing online assessments. This works particularly well for salespeople.
Increasing the return from your employee referral program; referred employees stay longer, produce faster, and perform better.
Ramping up proactive sourcing efforts to identify game-changing, high-impact employees who drive higher returns for the company.
Implementing an idea or innovation recruiting initiative that yields products or services that your company sells.
Targeting internal mobility/continuous recruiting initiatives to top performers and subsequently reducing the turnover rate of these individuals, who drive significantly more revenue and profits than their peers.
Implementing "source optimization programs" to ensure that the top-performing sources of hire as measured in revenue generated are optimized and used more often.
You can, of course, continue to operate as a service provider that handle TRAINIING AND DEVELOPMENT PROGRAMS TO IMPROVE THE SKILLS AND KNOWLEDGE LEVEL TO IMPROVE THE PERFORMANCE / PRODUCTIVITY/ HENCE THE RESULTS.
================================================== ====
Align tactics with strategy and monitor performance with scorecarding.
Greater efficiency—align tactics with strategy to use resources effectively.
Increased accountability—assign owners for each metric and responsibility for performance.
Increased focus—concentrate on priorities and eliminate distractions.
Improved communication—communicate results and actions taken to manage performance.
Improved collaboration—use metrics to link together people, departments, and processes.
==================================================
2.THE COST EFFICIENT INITATIVES.
-these initatives can help to enrich the bottomline.
HERE WE MOSTLY USE METRICS AS STANDARDS.
1. Strategic Perspective — the results of strategic initiatives managed by the HR group. The strategic perspective focuses on the measurement of the effectiveness of major strategy-linked people goals.
EXAMPLES
-change management capability of the organization
-organization compensation and benefit package with respect market rate.
-HR BUDGET / ACTUAL
-HR COSTS BENCHMARK EXTERNALLY
-HR annual resource plan.
-skills/ competency level
etc
2.Operational Perspective — the operational tasks at which HR must excel. This piece of the Balanced Scorecard provides answers to queries about the effectiveness and efficiency in running HR processes that are vital to the organization.
EXAMPLES
-time taken to fill vacancies
-cost per recruitment promotions
-absenteeism by job category
-accident costs
-accident safety ratings
-training cost per employee
-training hours per employee
-average employee tenure in the company
-lost time due to injuries
-no. of recruiting advertising programs
-no. of employees put through training.
-turnover rate
-attrition rate
etc
3.Financial Perspective — this perspective tries to answer questions relating to the financial measures that demonstrate how people and the HR function add value to the organization.
EXAMPLES
-compensation and benefits per employee
-sales per employee
-profit per employee
-cost of injuries
-HR expenses per employee
-turnove cost
-employee '' workers compensation costs''
etc
=========================================
HERE ARE SOME COMMON EXAMPLES.
FOR EACH ELEMENT, YOU CAN SET YOUR OWN
THRESHHOLD, BASED ON YOUR COMPANY
STRATEGY/ HR STRATEGY.
==================================================
1.ABSENTEEISM PER EMPLOYEE [DAYS]
2.AVERAGE RECRUITMENT TIME [DAYS]
3.EMPLOYEE TURNOVER [ % ]
4.EMPLOYEE SATISFACTION [ LEVELS ]
5.AVERAGE EMPLOYEE TENURE [ YEARS]
6.INDUCTION TRAINING [ % OF NEW EMPLOYEES]
7. TRAINING WORKSHOP [ % ] CONDUCTED/PLANNED
8. TRAINING AT EXTERNAL COURSES [ %] ACTUAL / PLANNED
9.PERFORMANCE APPRAISALS [ NOS.] AGAINST TOTAL EMPLOYEES.
================================================== ===
HERE ARE SOME
PROBABLE HR METRICS IN COMPENSATION ONLY
1.ANNUAL TOTAL COMPENSATION INCREASE RATE [%] [this year vs last year]
2.ANNUAL TURNOVER RATE.[this year v s last year]
3.COMPENSATION &BENEFITS AS A % OF SALES.
4.COMPENSATION & BENEFITS AS A % OF OPERATING EXPENSES.
5.COMPENSATION & BENEFITS PER EMPLOYEE [ this year vs last year]
6.COMPENSATION & BENEFITS COMPETITIVENESS INDEX.
7.INCENTIVE PAYMENT AS A % OF TOTAL COMPENSATION & BENEFITS.
8.BENEFITS SPEND AS A % OF TOTAL COMPENSATION & BENEFITS
9.COMPENSATION & BENEFITS BY LEVELS OF STAFF
-senior mgnt/ executives/middle mgnt/ junior mgnt/supervisors/staff etc.
10.NEW COMERS COMPENSATION & BENEFITS AGAINST TOTAL FOR THE YEAR.
11.% OF EMPLOYEES SATISFIED WITH CURRENT SYSTEM [ SURVEY ]
12.MEDICAL BENEFITS EXPENSES TOTAL [ THIS YEAR VS LAST YEAR]
13.MEDICAL BENEFITS EXPENSES PER EMPLOYEE.
==================================================
HERE ARE SOME STANDARDS METRICS
1
HR UTILIZATION
%
TOTAL PAYROLL $ / TOTAL SALES $
2.
HR PRODUCTIVITY
%
TOTAL EMPLOYMENT COST $/TOTAL
PRODUCTION VOLUME IN $ X 100
3.
HR BUDGET
%
ACTUAL $ / BUDGET $ X 100
4'.
ACCIDENT COSTS
%
CURRENT ACTUAL $ / LAST YEAR $ X 100
5'.
ACCIDENT SAFETY
%
CURRENT ACTUAL $ / LAST YEAR $ X 100
RATINGS
6'.
EMPLOYEE
%
EMPLOYEE BENEFITS $ / TOTAL PAYROLL $ X100
BENEFITS
EMPLOYEE BENEFITS $ /TOTAL SALES $ X 100
7'.
HR BUDGET
%
ACTUAL HR EXPENSES $ / TOTAL SALES $ X 100
sales effectiveness
8'.
HR EXPENSES
$
TOTAL HR EXPENSES $ / TOTAL NO. OF EMPLOYEES
per head
9'.
HR EXPENSES
%
HR EXPENSES $ / TOTAL EXPENSES $ X 100
cost effectivenss
10'.
NO.OF COURSES
%
ACTUAL CONDUCTED / PLANNED X 100
CONDUCTED
11.
NO. OF SAFETY
%
ACTUAL CONDUCTED / PLANNED X 100
training programs
12.
TRAINING DAYS
%
ACTUAL TRAINING DAYS / PLANNED X 100
EFFECTIVENESS
13.
EMPLOYEES
%
ACTUAL TAKING PART / PLANNED X 100
involvement in train
14.
SICK DAYS
nos.
TOTAL SICKDAYS TAKEN/ TOTAL EMPLOYEES
managemeent effectiveness
15.
STAFF orientation
%
NO. OF NEW STAFF LEAVING IN THREE MONTHS/
EFFECTIVENESS
TOTAL NO. OF NEW STAFF ORIENTED
X 100
16.
TIME TO FILL AN
NO.DAYS
TOTAL NO OF DAYS / TOTAL NO positions filled
OPEN POSITION
17.
TURNOVER BY
%
TURNOVER / TOTAL RECRUITMENTS X100
RECRUITING source
BY EACH SOURCE
18.
TURNOVER BY
%
TURNOVER / TOTAL EMPLOYEES BY EACH
EACH JOB
CATEGORY
CATEGORY
X 100
19.
WORKERS
%
ACTUAL $ / PLANNED BUDGET $ X 100
çompensation costs
20.
HR STAFFING
NO.
TOTAL HR STAFF / TOTAL EMPLOYEES
EFFICIENCY
============================= ============
Pulling it All Together-----Building a Scorecard
Zeroing in on Metrics that Matter
Begin your program with a solid foundation of basic metrics: cost-per-hire, turnover, etc.
Ask managers what issues concern them – what impacts productivity, makes their lives easier?
Based on the responses, determine which metrics affect the areas identified, and then determine which measures provide results that clarify the values identified.
Benchmark what others are doing in terms of the specific metrics you choose. Don’t spend valuable time on benchmarking until you know which metrics are important to your organization.
Zeroing in on Metrics that Matter
Take a numerical snapshot of your present situation.
Analyze the outcomes of the proposed action.
Decide what tools are needed in terms of technology and outside assistance.
Make a business case for the action and outcome you decide to pursue.
Show managers updated report (via metrics) on how HR has contributed to their success.
Strategic Relationships
Process must be owned by Executives, Managers, HR, Finance, and IT
Takes time and will power
May require an investment in information technology support services to support human capital measurement and reporting opportunities
Requires the fostering of key strategic relationships to ensure favorable outcomes
Wrap-Up
Take "baby steps" by starting with a few key metrics.
You don’t have to change the whole organization at once.
Measurement and management go hand in hand.
This has courtesy to :
LEO LINGHAM
PRINCIPAL: BestBusiCon Pty Ltd
You too can help the organization
to drive the business.
1. Analyze the organization’s vision
– Evaluate, articulate and clarify the organization’s
strategic plan for accomplishing its vision. Every firm should have a unique vision
and a specific plan to achieve it. Consider all the ways that the HR department
currently helps or hinders the company’s mission. How could changes in HR policies,
procedures and practices positive affect the strategy? What can HR do to make
it more likely that employees will achieve the company’s vision according to its
strategic plan?
2. Create a business case
– Clearly show upper management how and why HR is a
strategic asset and how it can increase profits. Explain how HR will provide the
organization with its most critical resource: qualified, valuable employees capable of
implementing and achieving the strategic plan. Show how HR can build employees’
knowledge, skills, abilities and attitudes to help the company achieve its mission. It
used to be that typical companies regarded the HR function in terms of "how can we
cut costs." But, today’s most profitable, forward-looking organizations view HR in
terms of "how can an HR strategy result in increased profitability?" The answer to
this question will help upper management see the value of strategic HR.
3. Determine how the company creates value
– How does the organization serve its
customers or clients? Draw a strategy map that illustrates the steps toward meeting
strategic goals. Identify the behaviors that achieve those objectives.
4. Identify HR enablers and performance drivers
– Use the strategy map to diagnose where
HR can make positive changes to elicit behaviors that mark good performance.
5. Evaluate the current HR system
– Look at your organization, policies, procedures,
compensation and reward programs. Does the system augment the company’s key
performance drivers? Do your policies attract, develop and retain staffers who
produce the results the company wants? If not, the policies are misaligned.
6. Define what you need to measure
– What factors can you measure to show if HR
is helping or hindering strategic performance? Create a system to collect data and
measure those factors. This will be your company’s "HR Scorecard." Its numbers are
only as valuable as the relevant information they provide about specific situations.
Much of this data may not be readily available because it wasn’t previously measured.
Since irrelevant data is of no benefit, you may need to collect new types of data, more
frequent data or data from new sources.
7. Implement the HR Scorecard
– Gather data, measure performance outcomes and
analyze the results. This information lets you tweak HR’s activities and approach to
support the company’s strategic objectives more powerfully.
================================================== ==
An effective HR Scorecard serves two purposes as an management tool:
• It gives you the information you need to adjust HR’s actions and behaviors to achieve
better results.
• It validates HR’s contribution to the company’s success in financial terms.
WHAT YOU CAN DO WITH YOUR SCORECARD
• Focus the Scorecard on the most important goals in terms of the firm’s strategy.
• Determine how the elements of HR’s own system reinforce (or contradict) one
another. For instance, if you are always at full staffing levels, but the quality of the
staff is inadequate, then HR is not meeting the firm’s needs or supporting a strategy
that requires a high quality staff.
• The things you decide to measure on the HR Scorecard will attract attention, thus
they are the elements that will get managed. Select them carefully.
• Showcase the relationship between the cost and benefits of HR deliverables. For
example, it may cost more per hire to attract, recruit and retain high-quality staff,
but the benefits may outweigh the additional cost.
• Help upper management understand how HR can create value, so executives see that
it may be financially wiser to invest in HR than to cut its expenses.
• Differentiate between HR doable (what HR does) and HR deliverables (something
that creates desired employee behaviors that drive the company’s overall strategy).
• When evaluating measurements and results, recognize the difference between
leading indicators and lagging indicators.
• If the company’s strategy changes or the performance drivers affecting that strategy
change, HR’s strategy must also change and you must update the Scorecard.
• Conduct a Return on Investment (ROI) analysis to determine the best way for HR to
produce results that abet the company’s strategic plan.
FINALLY WHAT HRM SHOULD DO
1. HRM VISIBILITY --Make regular presentations about your successes/
contributions/ upcoming programs.
--------------------------------------------------------------------
2. HRM credibility – Sustain credibility by "living" the values you espouse, working
with others, establishing win-win relationships, being honest and taking initiative.
-----------------------------------------------------------------------
3. HRM Ability – Show you are able to organize, orchestrate, manage and deliver change initiatives.
which should aim at the HR objectives aligned with corporate objectives
-----------------------------------------------------------------------------------------
4. Cultivate the company’s culture – Deliberately weave the company’s values, mission,
vision and strategy into the HRM way into the business operation on day-to-day basis.
-------------------------------------------------------------------------------
5. Proficiency – Become capable in HR practices, theories and procedures. Commit to
learning and to delivering results based on what you learn from the company business.
-----------------------------------------------------------------------------------
6. Business knowledge – Understand how your company operates. Know its
technological, strategic, financial, sales and marketing functions. Understand how
they interact with each other and with HR, so you can identify ways HR can help.
--------------------------------------------------------------------------------------------------
7. Strategic performance management -Identify and link the strategic ways
that HR can contribute to the company’s
overall strategy and success.
------------------------------------------------------------------------------------
8. HR SCORECARD - Identify and implement appropriate, accurate ways to measure the influence of
HR activities on performance drivers and corporate strategy.
----------------------------------------------------------------------------------------------
9. HRM IMPACT - Estimate the potential implications of a change in HR to identify patterns and
connections in seemingly unrelated data, and to determine the impact that this
change will have on the company’s profits.
------------------------------------------------------------------------------------------------
10.THE MOST IMPORTANT OF ALL - HR COMMUNICATION -
Communicate how HR affects overall strategy and profits, so senior management
can understand that the change in HR represents a positive return on investment.
==================================================
If You Don’t Measure it, You Won’t Improve it
There are two ways, the HRM can contribute to the
GROSS PROFIT CONTRIBUTION.
1.GROWTH ORIENTED INITATIVES.
2.COST EFFICIENT INITATIVES.
1. THE GROWTH ORIENTED INITIATIVES.
Your impact on corporate performance is indeed measurable.
A statistical technique called regression analysis is one excellent way to measure your impact. The guiding principle of an effective regression analysis is to isolate certain variables (i.e., more effective talent management practices) in order to better measure their impact.
An example of this is focusing on a specific group of employees who can be tied to revenue, and implement initiatives or programs targeted toward these individuals.
Microsoft is even beginning to experiment with this technique in its workforce-planning efforts.
These are just a few of the ways you can demonstrate your impact on revenue and profits:
Improving the selection process for revenue-generating employees by implementing online assessments. This works particularly well for salespeople.
Increasing the return from your employee referral program; referred employees stay longer, produce faster, and perform better.
Ramping up proactive sourcing efforts to identify game-changing, high-impact employees who drive higher returns for the company.
Implementing an idea or innovation recruiting initiative that yields products or services that your company sells.
Targeting internal mobility/continuous recruiting initiatives to top performers and subsequently reducing the turnover rate of these individuals, who drive significantly more revenue and profits than their peers.
Implementing "source optimization programs" to ensure that the top-performing sources of hire as measured in revenue generated are optimized and used more often.
You can, of course, continue to operate as a service provider that handle TRAINIING AND DEVELOPMENT PROGRAMS TO IMPROVE THE SKILLS AND KNOWLEDGE LEVEL TO IMPROVE THE PERFORMANCE / PRODUCTIVITY/ HENCE THE RESULTS.
================================================== ====
Align tactics with strategy and monitor performance with scorecarding.
Greater efficiency—align tactics with strategy to use resources effectively.
Increased accountability—assign owners for each metric and responsibility for performance.
Increased focus—concentrate on priorities and eliminate distractions.
Improved communication—communicate results and actions taken to manage performance.
Improved collaboration—use metrics to link together people, departments, and processes.
==================================================
2.THE COST EFFICIENT INITATIVES.
-these initatives can help to enrich the bottomline.
HERE WE MOSTLY USE METRICS AS STANDARDS.
1. Strategic Perspective — the results of strategic initiatives managed by the HR group. The strategic perspective focuses on the measurement of the effectiveness of major strategy-linked people goals.
EXAMPLES
-change management capability of the organization
-organization compensation and benefit package with respect market rate.
-HR BUDGET / ACTUAL
-HR COSTS BENCHMARK EXTERNALLY
-HR annual resource plan.
-skills/ competency level
etc
2.Operational Perspective — the operational tasks at which HR must excel. This piece of the Balanced Scorecard provides answers to queries about the effectiveness and efficiency in running HR processes that are vital to the organization.
EXAMPLES
-time taken to fill vacancies
-cost per recruitment promotions
-absenteeism by job category
-accident costs
-accident safety ratings
-training cost per employee
-training hours per employee
-average employee tenure in the company
-lost time due to injuries
-no. of recruiting advertising programs
-no. of employees put through training.
-turnover rate
-attrition rate
etc
3.Financial Perspective — this perspective tries to answer questions relating to the financial measures that demonstrate how people and the HR function add value to the organization.
EXAMPLES
-compensation and benefits per employee
-sales per employee
-profit per employee
-cost of injuries
-HR expenses per employee
-turnove cost
-employee '' workers compensation costs''
etc
=========================================
HERE ARE SOME COMMON EXAMPLES.
FOR EACH ELEMENT, YOU CAN SET YOUR OWN
THRESHHOLD, BASED ON YOUR COMPANY
STRATEGY/ HR STRATEGY.
==================================================
1.ABSENTEEISM PER EMPLOYEE [DAYS]
2.AVERAGE RECRUITMENT TIME [DAYS]
3.EMPLOYEE TURNOVER [ % ]
4.EMPLOYEE SATISFACTION [ LEVELS ]
5.AVERAGE EMPLOYEE TENURE [ YEARS]
6.INDUCTION TRAINING [ % OF NEW EMPLOYEES]
7. TRAINING WORKSHOP [ % ] CONDUCTED/PLANNED
8. TRAINING AT EXTERNAL COURSES [ %] ACTUAL / PLANNED
9.PERFORMANCE APPRAISALS [ NOS.] AGAINST TOTAL EMPLOYEES.
================================================== ===
HERE ARE SOME
PROBABLE HR METRICS IN COMPENSATION ONLY
1.ANNUAL TOTAL COMPENSATION INCREASE RATE [%] [this year vs last year]
2.ANNUAL TURNOVER RATE.[this year v s last year]
3.COMPENSATION &BENEFITS AS A % OF SALES.
4.COMPENSATION & BENEFITS AS A % OF OPERATING EXPENSES.
5.COMPENSATION & BENEFITS PER EMPLOYEE [ this year vs last year]
6.COMPENSATION & BENEFITS COMPETITIVENESS INDEX.
7.INCENTIVE PAYMENT AS A % OF TOTAL COMPENSATION & BENEFITS.
8.BENEFITS SPEND AS A % OF TOTAL COMPENSATION & BENEFITS
9.COMPENSATION & BENEFITS BY LEVELS OF STAFF
-senior mgnt/ executives/middle mgnt/ junior mgnt/supervisors/staff etc.
10.NEW COMERS COMPENSATION & BENEFITS AGAINST TOTAL FOR THE YEAR.
11.% OF EMPLOYEES SATISFIED WITH CURRENT SYSTEM [ SURVEY ]
12.MEDICAL BENEFITS EXPENSES TOTAL [ THIS YEAR VS LAST YEAR]
13.MEDICAL BENEFITS EXPENSES PER EMPLOYEE.
==================================================
HERE ARE SOME STANDARDS METRICS
1
HR UTILIZATION
%
TOTAL PAYROLL $ / TOTAL SALES $
2.
HR PRODUCTIVITY
%
TOTAL EMPLOYMENT COST $/TOTAL
PRODUCTION VOLUME IN $ X 100
3.
HR BUDGET
%
ACTUAL $ / BUDGET $ X 100
4'.
ACCIDENT COSTS
%
CURRENT ACTUAL $ / LAST YEAR $ X 100
5'.
ACCIDENT SAFETY
%
CURRENT ACTUAL $ / LAST YEAR $ X 100
RATINGS
6'.
EMPLOYEE
%
EMPLOYEE BENEFITS $ / TOTAL PAYROLL $ X100
BENEFITS
EMPLOYEE BENEFITS $ /TOTAL SALES $ X 100
7'.
HR BUDGET
%
ACTUAL HR EXPENSES $ / TOTAL SALES $ X 100
sales effectiveness
8'.
HR EXPENSES
$
TOTAL HR EXPENSES $ / TOTAL NO. OF EMPLOYEES
per head
9'.
HR EXPENSES
%
HR EXPENSES $ / TOTAL EXPENSES $ X 100
cost effectivenss
10'.
NO.OF COURSES
%
ACTUAL CONDUCTED / PLANNED X 100
CONDUCTED
11.
NO. OF SAFETY
%
ACTUAL CONDUCTED / PLANNED X 100
training programs
12.
TRAINING DAYS
%
ACTUAL TRAINING DAYS / PLANNED X 100
EFFECTIVENESS
13.
EMPLOYEES
%
ACTUAL TAKING PART / PLANNED X 100
involvement in train
14.
SICK DAYS
nos.
TOTAL SICKDAYS TAKEN/ TOTAL EMPLOYEES
managemeent effectiveness
15.
STAFF orientation
%
NO. OF NEW STAFF LEAVING IN THREE MONTHS/
EFFECTIVENESS
TOTAL NO. OF NEW STAFF ORIENTED
X 100
16.
TIME TO FILL AN
NO.DAYS
TOTAL NO OF DAYS / TOTAL NO positions filled
OPEN POSITION
17.
TURNOVER BY
%
TURNOVER / TOTAL RECRUITMENTS X100
RECRUITING source
BY EACH SOURCE
18.
TURNOVER BY
%
TURNOVER / TOTAL EMPLOYEES BY EACH
EACH JOB
CATEGORY
CATEGORY
X 100
19.
WORKERS
%
ACTUAL $ / PLANNED BUDGET $ X 100
çompensation costs
20.
HR STAFFING
NO.
TOTAL HR STAFF / TOTAL EMPLOYEES
EFFICIENCY
============================= ============
Pulling it All Together-----Building a Scorecard
Zeroing in on Metrics that Matter
Begin your program with a solid foundation of basic metrics: cost-per-hire, turnover, etc.
Ask managers what issues concern them – what impacts productivity, makes their lives easier?
Based on the responses, determine which metrics affect the areas identified, and then determine which measures provide results that clarify the values identified.
Benchmark what others are doing in terms of the specific metrics you choose. Don’t spend valuable time on benchmarking until you know which metrics are important to your organization.
Zeroing in on Metrics that Matter
Take a numerical snapshot of your present situation.
Analyze the outcomes of the proposed action.
Decide what tools are needed in terms of technology and outside assistance.
Make a business case for the action and outcome you decide to pursue.
Show managers updated report (via metrics) on how HR has contributed to their success.
Strategic Relationships
Process must be owned by Executives, Managers, HR, Finance, and IT
Takes time and will power
May require an investment in information technology support services to support human capital measurement and reporting opportunities
Requires the fostering of key strategic relationships to ensure favorable outcomes
Wrap-Up
Take "baby steps" by starting with a few key metrics.
You don’t have to change the whole organization at once.
Measurement and management go hand in hand.
This has courtesy to :
LEO LINGHAM
PRINCIPAL: BestBusiCon Pty Ltd
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